How to Protect Your Pending Home Purchase from Financial Risk

The national housing inventory shortage continues to be a barrier to home ownership for some potential buyers, many of whom are forced into rental agreements in their new locations while their search for a residential property drags on.  It is why the euphoria of having entered into a purchase contract is understandable.  But it is equally important to understand the responsibilities that accompany this stage in the process, one that is far more important than the others in protecting deposits, avoiding other risks, and more along the way to a safe closing on the property of choice so that this new chapter begins smoothly. 

A General Summary of the Mortgage Loan Process

It might be surprising to learn that the mortgage lender with whom the loan was originated will likely sell it along with others to an investor and possibly collect payments as the servicer on their behalf.  In these instances, the loan officer's company provides the upfront purchase funds for the transaction because the buyer met all of the requirements set forth by one of their investors to whom the loan will be sold.  Upon that sale, the lender's funds used for the subject transaction are restored and made available for other borrowers to use in purchasing homes.  See what they did there?  And here you thought it was a great big bank with loads of cash on hand.  It is, but it isn't.

Well, it's also all fun until the lender gets hurt, and they do.  Mortgage lenders often wind up carrying unsaleable mortgages because of a failure in compliance, so every effort is made to ensure that all details are thoroughly managed, the buyer is carefully vetted, meets loan eligibility requirements and that there are no questions about the loan.  Further, non-compliance can be problematic for potential buyers as well since many have put down sizeable earnest money deposits as both contributions to their down payments AND attractive guarantees in support of their promises to buy, all of it at risk of loss should the transaction not close.  This is why home buyers should take on the process with highest level of care to avoid the pitfalls along the way. 

How financial decisions have ruined perfectly good home buying transactions

The periods leading up to loan pre-approval and escrow when a property is finally under contract may be among the most sensitive along the way to purchasing a home, especially with regard to financial records for all borrowers on the mortgage loan.  Examples of financial decisions during this time that have cost home buyers dearly include

• Changing employment
• Making purchases that significantly increases credit balances
• Allowing or causing large, irregular and improperly-explained deposits into accounts
• Interpreting the quoted estimate of cash needed by buyer to close as static
• Failing to follow wiring instructions for closing funds

Mortgage borrowers are strongly urged to remain consistent with their income streams, credit and other fiscal responsibilities during the entire home buying process.  They should protect their interests in the property by planning for additional credit pulls, bank statement reviews, employment verifications and more before obtaining full mortgage loan approval, often right before the closing is scheduled and usually after any protective contract clauses have expired.   Doing so will increase the likelihood for a smooth settlement on mutually agreeable terms.

Frequently Asked Questions about Loan Approvals for Buying a Home

Why shouldn’t I make large purchases on credit when shopping for a home?

The loan pre-approval was likely based on your debt-to-income ratio that was found to be within a range that was acceptable to a particular investor.  Increases in debt can quickly move you beyond the pre-approved ratio and lead to a denial of your loan at the worst possible time.

Why can’t I plan on having exactly the quoted funds needed to close?

The quote was likely based on a specific closing date that captured, among other things, calculated daily interest.  While everyone works to meet the contract closing date, the closing can be off by a few days, requiring a recalculation of those daily charges and lead to a change in funds needed to close.  Granted, sometimes it works out in the buyer’s favor, but is just as likely to require more funds.

How do I avoid these costly errors?

Discussing your plans with the pre-approving lender before acting on them is the best way to avoid mistakes that could cost you your dream home.  The U.S. Department of Housing and Urban Development also lists several nationally HUD-approved Housing Counseling Agencies at their website, many of whom lead pre and post purchase counseling classes at affordable prices.

Wrapping Up

Whether you’re starting this exciting journey into home ownership or have already closed on the purchase, you’ve likely learned about the amount of work involved in the purchase of a home.  Others believed in you enough to invest their energy, time and yes, even tears sometimes, to help get the entire team over finish line where everyone wins.  You see, things beyond the home buyers’ control can and often do go wrong in most transactions.  If, however, you follow this guidance to reduce, even eliminate costly errors that are common among home buyers, you are certain to enjoy home ownership very soon, even in a tight real estate market.